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Xiaomi CEO and founder Lei Jun was in a combative mood when he launched the company’s new flagship phone, the Redmi Note 7 on January 10.

The Chinese tech firm is currently confronting all manner of issues, including a stock price collapse and a battle to keep up with smartphones sold under Huawei’s sub-brand Honor. It is also being forced to deal with declining sales for smartphones in general – still Xiaomi’s core business – as the country’s economy slows.

Lei’s response was to throw down the gauntlet to Honor. “If you don’t agree, let’s fight,” he said. It was a phrase designed to grab headlines since it has a double meaning in Chinese (the final character can also translate as a four-letter expletive, beginning with the same letter).

Honor’s CEO Zhao Ming decided to up the ante, throwing back a bit of Chairman Mao at him via his Sina Weibo account, with lines from the 1949 poem Reply to Liu Yazi.

This poetic advice might resonate with Xiaomi’s investors, who have suffered a 41.5% decline in the company’s share price since it listed at HK$17 per share on July 9 last year.

A long view is unavoidable at this juncture. One institutional investor, Chen Jiu-lin, of Joseph Investments told Baijiahao that he has kept hold of his shares and characterises Xiaomi’s performance as less about the company than the general tech sector rout that followed in the wake of its IPO.

That is partly true: JD.com has lost half of its value over the past year, Tencent a third and Alibaba a quarter.

But none have fallen faster and harder than Xiaomi, whose stock price suffered another 17% plunge in the three days straddling the expiry of its IPO lock-up on January 9.

On the same day, Lei and CFO Chew Shouzi announced that they were extending their own lock-ups for a further year. And since then Xiaomi has announced – somewhat unusually for a newly-listed firm – a stock buyback.

But all of this is likely to be of small comfort to Xiaomi’s pre-IPO investors, which were confident they would be repaid by billions of dollars in gains once the company went public. Instead, most of them find themselves sitting on losses.

At its current price of HK$9.96 per share, Xiaomi’s market capitalization is $30.33 billion. To put this decline in context: when Lei first floated the idea of an IPO, the bankers proposed a $100 billion valuation. Even after it went public at half that value, some analysts were suggesting that the stock was 50% overvalued and over the short-term they have turned out to be right.

This means that all of Xiaomi’s pre-IPO investors – i.e. those who bought tranches from 2014 onwards – are now underwater. For example, Xiaomi’s Series E funding round in December 2014 netted the company $1.1 billion on a $43.9 billion valuation.

At that point, rival smartphone brands Oppo and Vivo weren’t vying for Xiaomi’s crown and perhaps it seemed more realistic that the company was worth 10 times what it had been two years earlier, when Lei’s firm got valued at $4 billion.

In the period that followed before its IPO, Xiaomi also raised money from Indian mogul Ratan Tata and London-based All Blue Capital at undisclosed valuations.

This means that the only investors still sitting on gains are its earliest: Morningside, Qiming Venture Partners, IDG, Shunwei and Temasek.

The question other investors are asking is whether the stock is now oversold. Problematically for the bull case, Xiaomi’s price-to-earnings multiples have not moved as much as the share price. At IPO, it was valued at 22.7 times consensus 2019 estimates. Today it is valued at 16.8 times consensus 2019 forecasts.

Some financial analysts have target prices below HK$10 and most have cut their 2019 earnings forecast by about 15% and their 2020 by a quarter. (HSBC is at the more upbeat end of the range: it has a target price of HK$17.66, just above Xiaomi’s IPO price, valuing it at 29.43 times.)

The key issue is the weakening of smartphone sales in the Chinese market, which is buffeting the whole industry. Even Apple’s resellers took the unusual step of cutting prices by as much as a fifth earlier this month and Xiaomi’s Redmi Note 7 is another example of the same discounting in action. At a cost of Rmb999 ($147), the Note 7 is 9% cheaper than its Note 5, even though it has been upgraded in performance terms.

The price cut also reflects market share slippage. China Business News recently cited IDC China Quarterly figures, which suggested that Huawei’s market share expanded from 24.2% to 24.6% during the first three quarters of 2018, while Xiaomi’s fell from 15.1% to 13.6%. Xiaomi lags behind Oppo and Vivo too.

Preliminary reports coming out of China suggest that the fourth quarter was particularly bad for the whole industry and 2019 is not expected to be much better. This is partly because of a broader malaise in demand and partly because 2020 is expected to be an inflection point for 5G. Many consumers may wait the year out before they upgrade their smartphones.

Xiaomi’s fans tend to base their longer-term optimism on two factors: the company’s international expansion and the potential boost to sales from its Internet-of-Things (IoT) products, a category that should see an uptick in demand once the 5G era begins in earnest.

The company’s third quarter earnings showed that international revenues had jumped 112.7% year-on-year, accounting for 43.9% of its overall revenues. On the current trajectory it won’t be long before that percentage is more than 50%.

Huawei’s sub-brand Honor wants to follow Xiaomi’s lead and widen its geographical footprint. Huawei’s established presence internationally should make this easier ­– in theory, at least. However, if security concerns about Huawei’s data networks extend to the phones themselves, it might not prove so straightforward.

Xiaomi, meanwhile, continues to open new Mi shops, which look a bit like Apple Stores, but sell a wider range of goods. The latest launch is a Mi store on the Champs Elysees in Paris. As we reported in WiC434, Xiaomi has made a big splash in Europe where it went from zero market share at the end of 2017 to 4% by the end of the third quarter.

The next push looks likely to be made in Africa, where Android Authority has reported that Xiaomi is thinking about selling directly rather than through distributors. In India it has kept up its number one spot for smartphone sales, announcing the spinning off of the Redmi series into its own sub-brand, which will be more budget-focused. That should give Xiaomi more freedom to sell a range of higher-priced goods under the Mi label, and not be seen as just a phone brand. It hopes too that its huge expansion in stores will mean more revenues from IoT products over the coming quarters. Some analysts expect the IoT part of Xiaomi’s business to grow by about half over 2019, albeit from a relatively small base (9.2% of third quarter revenues).

Another interesting area to watch is partnerships. This month it purchased a 0.48% stake in TCL as the pair bulk up in a bid to make semiconductors. And late last year it sought to expand the scale of its IoT ecosystem by partnering with Swedish furniture giant IKEA on smart lighting.

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